COMMISSIONER OF INCOME TAX Vs. BANK OF INDIA

JUDGEMENT

(1.) THE question that falls for consideration in the present reference relates to the computation of the capital base of the assessee under the SPT Act, 1963 (hereinafter referred to as "the Act"), and the precise question is whether secret reserves maintained by the assessee bank are includible in the capital of the assessee. The assessee is a banking company and the assessment year is 1963 64 when the Act was applicable to the assessee. The computation of the super profits tax is to be made in accordance with the rules given in the Act; The rules contained in Sch. II to the Act provide for the computation of the capital base which computation is necessary for arriving at the standard deduction. The profits which are in excess over the standard deduction are only liable to super profits tax. Hence, the computation of standard deduction assumes significance.

(2.) THE assessee bank computed its capital for the purpose of calculating super profits tax, and in doing so it took into consideration the following items as constituting its reserves, viz., (1) Rs. 76,58,687 which represented the amount standing to the credit of the premium and discount account but which was not shown in its balance sheet; (2) Rs. 1,31,00,548 being the taxation reserve; and (3) Rs. 85,84,302, which were the depreciation reserve. It is common ground that the first amount of Rs. 76,58,687 did not figure in the published balance sheet of the bank and this was stated to be the amount merged in investments shown in item (4) of the balance sheet relating to the year ending on 31st Dec., 1961. Normally, the balance sheet for the assessment year in question, viz., 1963 64, would be the balance sheet as on 31st Dec., 1962, in relation to the calendar year 1962, which is the accounting year followed by the assessee bank. However, since for super profits tax we are concerned with the first day of the previous year for the computation of capital, it is necessary to look into the figures in the balance sheet relating to the year prior to the previous year and hence we are concerned with the balance sheet as on 31st Dec., 1961.

(3.) AS regards the depreciation reserve, the ITO has held that the inclusion of depreciation reserve could not be allowed since the bank had no reserve as such but had only claimed the amount written off from the various assets after the deduction of depreciation therefrom as reserve. Though the amount mentioned was Rs. 85,84,302 before the ITO and the AAC and at the time of the hearing of this appeal before the Tribunal, at the time of the application for making a reference it was admitted that the correct claim was only to the extent of Rs. 69,03,280 under this head. Against the order of the ITO, the assessee bank preferred an appeal and in the appeal the AAC confirmed the finding of the ITO with regard to all the three amounts. The assessee carried the matter further in appeal to the Tribunal. With regard to the first amount, the Tribunal took the view that the said amount constituted moneys kept available for the use of the bank and though this account was not styled as reserve, was kept to meet some eventualities and, therefore, it could be treated on a par with the reserve for contingency. The Tribunal further accepted that there may not be an express authorisation of the Board on this account and in this connection observed that a decision regarding a secret matter of this nature could not be taken by an executive action; the matter being a vital and a crucial one the decision would rest with the Board alone and it alone could take and assume responsibilities in that behalf. The Tribunal, therefore, held that such a reserve must have been created with the requisite authority from the board of directors though the evidence of such authority was not available. The Tribunal also took the view that the transfers to the said account could not be made by an express act of authority as in the case of other appropriations which were brought to the notice of the shareholders and the members of the public. The Tribunal, therefore, held that the said premium and discount account was reserve and, therefore, was eligible to be considered as capital base for the computation of capital base under the Act. As regards the taxation reserve, the Tribunal took the view that it was a provision and not a reserve. As regards the third amount of depreciation, the Tribunal felt that the very existence of such reserve was not proved to the hilt and, therefore, the view taken by the AAC and the ITO in the matter could not be disturbed.